Navigating Brexit: Getting to Grips with Customs Management

04 Oct 2017

The aim of the IoD’s Navigating Brexit series is to bring together members of the Institute with policy experts, industry specialists and politicians to move beyond headlines and discuss in practical terms what the process of the UK withdrawing from the EU might yield in terms of the possible impact for businesses, and how they can best prepare for life outside of the European Union.

For the first event in this series we invited six experts to make sense of the complex issues surrounding trade and customs management. They look at the range of possible policy outcomes from the Brexit negotiations and set out some of the ways in which companies can start taking positive action right now to equip themselves for whatever changes that lie ahead.

1. Leaving the Single Market and the EU Customs Union

Shanker Singham is Director of Economic Policy and Prosperity Studies at the Legatum Institute, an independent non-partisan policy, advisory and advocacy organisation based in London.

Singham states that for the UK to negotiate on domestic regulation (i.e. services) as well as tariffs in future Free Trade Agreements (FTAs) we must leave the Single Market and EU’s Customs Union.

He admits this would ultimately entail the UK becoming a third country (in other words, one that is not part of a Union) and therefore subjecting goods being sold between the UK and EU to customs clearance and conformity assessment procedures. However, while a full FTA is being agreed, Singham says that the two sides could agree a “zero-for-zero” [maintenance] agreement on tariffs and quotas.

Singham notes that even with a tariff-free trade agreement, rules of origin (used to determine a product’s country of origin), would be necessary for UK-EU trade, which stipulates a threshold for what counts for goods to be considered as having UK or EU “originating status” to qualify for continued tariff-free treatment. He maintains that the EU’s default rules of origin are fairly liberal and have gone on to agree more flexible rules in certain FTAs, albeit largely for developing countries.

He says that for a transitional period, these should be waived for EU-UK goods trade, subject to both sides agreeing to maintain the former’s Common External Tariff (CET) on imports from the rest of the world, to help firms adjust their supply chains to satisfy inevitable new origin requirements.

What are the next steps?

Singham says there is a range of schemes that he believes could help minimise firms’ disruption while a new customs cooperation agreement between the two sides is being created. They include origin self-certification for exporters as well as outward/inward processing to secure duty relief for goods which cross between the UK and EU multiple times or for transit purposes only to avoid cumulative duty payments. There would also be mutual recognition agreements between the UK and EU customs authorities that fall within the AEO programme.

2. The perils of going it alone

Hosuk Lee-Makiyama is a Director at the European Centre For International Political Economy, a think tank based in Brussels. He is a trade policy specialist and former trade representative for Sweden on behalf of the EU in negotiations at the World Trade Organisation (WTO)

Lee-Makiyama firmly believes that leaving the EU’s customs union is a mistake and Brexit underestimates the union’s collective bargaining power when it enters into a trade negotiation. He also argues that the EU and UK’s offensive interests in trade agreements are one and the same, and that it is unlikely the UK on its own will be able to secure the same market openings unless it is prepared to “throw its protected industries under the bus”, including agriculture and heavy machinery.

Also, the costs involved in complying with rules of origin would not be worth the ostensible gains from new Free Trade Agreements (FTAs), which in any event would at best mimic what the UK would have acquired through an EU FTA.

What are the next steps?

Even though most politicians and analysts have written off the idea of remaining in the customs union as being feasible or likely given our Prime Minister’s stated position, Lee-Makiyama says it should still be on the table.

3. Taxing Times

Robert Murphy is a Customs Expert. He was formerly worked at the Irish Customs Authority, DG TAXUD in the European Commission and the World Customs Organisation

Murphy says his position is representative of most customs authorities, which is one of control and risk [assessment and management].

He cites the recent EU fraud watchdog investigation into HMRC’s allegedly lax enforcement of Chinese goods entering the UK at undervalued duty rates as an example of why the EU would be more resistant to approving a Brexit deal that allows for a completely seamless border to continue outside of a customs union arrangement.

Murphy also draws on his experience of working on the fiendishly complicated new EU UCC while in the European Commission and says that both customs authorities and companies are barely managing to keep pace with implementing this new change.

This, he says, illustrates the immense scale of the challenge facing HMRC in trying to simultaneously and rapidly be ready to cope with the potential five-fold increase in import/export declarations from EU trade and new inspection requirements upon leaving the Customs Union.

What are the next steps?

Murphy says the UK and EU could and should move as quickly as possible to set up a joint customs cooperation committee, which was also one of the IoD’s initial Brexit recommendations. He also stresses that HMRC will not be able to plan for changes until a final agreement is reached on the future EU-UK relationship. Therefore the UK needs to agree on a deal to stay in the EU’s Customs Union until a new customs cooperation agreement is reached and all customs authorities are ready to adapt to it, to prevent a breakdown in their computer systems management.

4. Trade Beyond Borders

Alex Veitch is the Head of Global Policy & Customs Lead for the Freight Transport Association (FTA)

The FTA is one of the UK’s largest trade associations and the logistics industry actually employs more people in this country than financial services. Veitch says it’s extremely helpful for the FTA to have links with so many of its sister organisations in other countries because they are constantly working towards cross-border trade facilitation.

Even before Brexit the FTA was working on how to avoid [the scope for] border delays. He categorises what might happen in the future into three scenarios: frictionless trade (what we have now), low-friction (simplified procedures) and high friction (WTO rules only). He says FTA started from the point of leaving the Customs Union and that his industry had to use that as the starting point given “that ship has sailed”.

He explains that the high-friction scenario would mean using established third country customs procedures for all EU trade, and there is no real understanding of the impact of this yet so they have asked HMRC to do a thorough impact/cost analysis. Low-friction trade would involve using AEO and other simplified procedures – AEO is used around the world and is a well-known, established certification method.

What are the next steps?

Veitch says the UK Government/HMRC desperately needs its own Trade Facilitation Committee, which would help integrate many of the nuts and bolts that underpin trade policy issues in practice. He also stressed the need for an established dialogue between Irish and British customs authorities, in tandem with industry, to help sort through, identify and put forward possible solutions together for the land border issue.

5. Deal or No Deal

Håkan Henningsson is the Senior Manager at BDO in Customs, Excise & International Trade

Henningsson advises on customs special procedures, tariff classification, Authorised Economic Operator (AEO) applications and related issues for clients - who are mostly goods-trading firms. Given the present level of uncertainty, he often advises clients to ask themselves what they can do now to prepare for the ‘what if’ situation where no trade deal is agreed at the end of the two-year timeline, which he also believes is a distinct possibility.

Firstly, he says, it is not only tariffs that would be an issue for traders, but also non-tariff barriers. This would include customs declarations for UK-EU trade after Brexit – and that managing all the different touchpoints will become a major issue. To use the car industry as an example, parts will cross borders on multiple occasions before the finished product is exported from the UK to the US. On average, only 41% of the components in cars exported from the UK are made in Britain.

Henningsson also looks at duty rates, with any increase as a result of Brexit adding an extra cost that, in turn, necessitates thinking about how that impacts upon your entire supply chain, distribution and profit line.

This may mean having to replace EU suppliers with UK suppliers or moving UK operations to an EU member state to avoid the extra cost and complexity of customs declarations and tariffs.

He also says in the absence of a deal, it is arguable whether British-based traders would continue to benefit from preferential duty rates in existing EU trade agreements which currently apply to the UK. Unbundling these (quotas, rates and simplified customs procedures) will not be straightforward and based on discussions with HMRC it has been confirmed that AEO programmes will continue in UK format as part of the porting-over of EU law – including the Union Customs Code (UCC) - into British statute as part of the Great Repeal Bill process. Therefore, he said there was no reason for firms to wait and see, but continue to implement the UCC and apply for AEO authorisation, noting that the process can take up to 12 months.

Henningsson won’t necessarily rule out a customs union arrangement between the UK and EU, as the current wording of government policy might be posturing on this for negotiating purposes, but that firms shouldn’t expect or plan on that basis.

What are the next steps?

Reviewing the terms of contracts with suppliers and customers, identifying who is responsible for what particularly if or when current UK-EU trade moves to import-export declaration status, and reviewing your IT systems all represent an essential part of the planning process.

6. The best ‘worst-case scenario’

Brian Leapman is the MD of Leapman Exports Ltd. MD, and author of the vision paper produced by SITPRO Business Process Analysis Working Group, which led to the Single Window Concept for international trade

Leapman looks at what business can do now to ‘get out of sticky situations’ and says the worst-case scenario is Britain leaving the EU without a trade deal in place.

Should that situation arise, and taking a UK service company as his model, Leapman suggests that by creating a UK-owned EU subsidiary, this would allow a business to bid and offer services to EU customers and clients and would still be able to bid on EU government contracts. He says you could also place that subsidiary in a low-corporation tax EU country, whilst also considering where your inward processing is, to limit additional costs. Therefore, he says, for a service company, this is a comparatively straightforward option to maintain existing EU contracts.

For companies trading in products, Leapman says there is a wider range of possible options and variables to consider. For example, he suggests that UK companies trading in the EU should change their terms of trade to ‘duty paid’ to ensure customers would not have to pay more duty to get your product into their market. Furthermore checking your products’ import duty rates into the EU could actually show that that tariff is non-existent.

He also suggests that some businesses should consider whether it is worth setting up an EU sales company located in a low-cost jurisdiction. He argues that this would remove the double-duty possibility, and could be used for re-export to other non-EU countries.

What are the next steps?

Leapman says companies should be looking at schemes such as inward/outward processing relief because of the significant scope for cost savings, adding that even HMRC are at a loss to explain why so few firms made use of these provisions even for non-EU trade. He hopes that Brexit will act as a catalyst for wider business take-up, arguing that even temporarily taking on an external trade advisor to help sort through the paperwork will be worth it in the long run.

Navigating Brexit for business

To help you navigate your way through the complex Brexit minefield, we have created a hub where you can find the latest information, guidance and advice to support and inform you and ensure you are fully up to date.